Property management through a management company

Why manage property through a company structure?

A residential property management company is set up either by a group of owners who each own a part of one building or group of buildings, or by a developer who constructs or divides the building in the first place.

The usual structure is that each unit owner (by unit, we mean a flat or a house) has a long lease of his or her property from the management company, which owns the freehold.

Examples of the types of property typically managed in this way include:

a large house divided into a number of flats

block of flats

small housing estate

What all the above examples have in common is a requirement for the individual owners to take responsibility for the building they "own" together. So within the collective group of owners we have a diverse group of people with only one thing in common - the building.

Despite holding each unit (such as a flat) independently, the owners are likely have a shared interest in common parts like stairways, parking areas, gardens, as well as the fabric of the building itself.

The reasons to use a property management company then become apparent:

each unit depends upon the others for physical support and protection - quite literally

the company can hold the freehold title to the building and surrounding land, so that a new legal transfer of all of it is not needed every time a unit changes hands

decisions can be made democratically on all aspects of the management of the building

the structure re-assures existing and potential long leaseholders that there is a proper structure in place to maintain the value of the building and regulate the relationship between the owners

Company organisation

Such a company is always a private limited company, but it could be either limited by shares or by guarantee, with either type working perfectly well. But in practice, leaseholders prefer it to be a company limited by shares as this provides a direct link between a shareholder and the building. It gives him or her ownership, albeit indirectly.

The company will issue only one share per flat or other division. So a small block of flats or mini-estate of houses might have issued only ten shares of one pound each. Of course, each share has one vote and no-one has a casting vote.

In a new-build situation, the developer will form the company before he sells the first unit, and will retain the shares to be allocated later to each of the other flats. That enables him to continue to control the building until he no longer needs that control.

How a property management company differs from a trading or commercial company

A management company requires different provisions in its articles of association from a trading company in order to be able to meet its objectives.

As the sole object of the company is to manage the property, the articles should include a very precise objects clause. That way, it will require more than a mere 51% of the shareholders to agree to engage in a trade or a property deal; to use the garden personally, or engage in any other activity which may be unfair to other owners.

The number of issued shares in the company should be equal to the number of flats, houses or units in the property.

Every property might be owned by a director. Of course, if some properties are owned by two or more people, then only one of them will represent their flat or unit. That might give the company many directors, so the basis of decision making (particularly decision making on different subjects) needs to be clear in the articles.

Alternatively, the owners may appoint a certain number of them to be directors for a short period of time (such as one year) and hope that they are well represented. In this case, again, how decisions are made needs to be set out very clearly.

The articles will need to include additional clauses relating to how expenses are funded, and who collects the money and on what basis. 'What if scenarios also need to be considered such as what happens if an owner refuses to contribute or has no money?

Importantly, you should include a provision for a new purchaser to become a shareholder of the company and for the seller/assignor to have an obligation to transfer his or her one share. When the assignment of a leasehold (when a sub-property unit is sold) takes place, the conveyancer will also make sure his buyer client also takes the transfer of the share in the management company.

Using a model set of articles of association

If you are new to being a shareholder, you will have found references to “old” companies and “new” ones. The reason is that the Companies Act 2006 changed and consolidated old law, some of it unchanged since 1948. Surprisingly, many companies still cruise along using articles of association from “the olden days”.

New law has provided a set of “model” articles. Despite the name, they are quite unsuitable for a property management company - they really are just a model on which you might base those your company rather than being suitable for any company.

Solicitors at Net Lawman have edited the model set specifically for a property managemen company, and you can find them here.

Please note that the information provided on this page:

Does not provide a complete or authoritative statement of the law;

Does not constitute legal advice by Net Lawman;

Does not create a contractual relationship;

Does not form part of any other advice, whether paid or free.

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